It may sound like a paradox but loans have benefits beyond the principal amount received at the start of a loan. This depends on how you manage it, though.
Before we dive into these benefits, it is important that you understand the only difference between these two types of loans. The sole difference lies in the availability of collateral supplied by the borrower. In simple English, collateral is an asset provided by the borrower to stand as support to cover the outstanding amount of a loan should the borrower default on monthly installments. All loans work on the same basic principles but there are two fundamental differences. These two different loans are called:
- Secured loans;
- Unsecured loans.
We never plan to default on loan installments, but having an asset that stands as collateral for your loan will have significant benefits for your cash flow and credit score. A secured loan brings assurance to the credit provider that the borrower has the financial capability to repay a loan. There is also a psychological effect that comes into play with secured loans. The fact that your house or your car is in the balance will serve as motivation to spend your hard earned money with diligence. The lower risk and added motivation holds some key benefits:
- Because there is less risk involved for the credit provider, a lower interest rate will be charged. This will help with the overall health of your credit.
- Your monthly installments should be less in comparison to unsecured loans.
- If you default on payments, the asset will cover the loan. This means you won’t need to take out loans to ensure the consolidation of your debt.
Good examples of unsecured loans are online loans like pay day loans. A pay day loan works as follows – You apply for the loan with the promise that you will repay the loan by the time you receive your next paycheck. This may sound like a form of collateral, but you have to remember that a paycheck is still subject to the fact that you do your part at work for your employer. Unsecured loans have no collateral. This simply means that if you default on your payments, there is nothing with which to recover the outstanding amount of your loan. However, it does hold some benefits:
- The process of receiving an unsecured loan is much faster than that of a secured loan.
- If you default on monthly installments, you won’t lose for example your house or your car.
- You don’t have to be a homeowner to be eligible for an unsecured loan. In fact, you don’t have to own any asset deemed worthy by the credit provider. As long as you can prove that you have the capacity to repay it, you will be eligible for an unsecured loan.
As the saying goes, it takes two to tango. Just make sure that whether secured or unsecured, you are choosing a loan you are willing to dance with.